Public Information Notice: IMF Concludes Article IV Consultation with Poland
March 31, 2000
|Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.|
On March 15, 2000, the Executive Board concluded the Article IV consultation with Poland1.
Poland's economic performance during the past decade of transition has been outstanding. From 1993-1998, real GDP increased by an average of 5½ percent a year, while inflation declined from more than 35 percent to 8 percent. Unemployment was reduced to the low double digit level, with over two thirds of all jobs in the private sector.
In 1998-1999, the macroeconomic performance faltered, mainly due to the effects of strong external shocks. Exports were hard hit by the Russian crisis and the slowdown in EU demand. Combined with the loss of competitiveness to Asian countries, and the lagged effects of a countercyclical monetary tightening in 1997, real GDP growth decelerated to about 2 percent in the first half of 1999. Registered unemployment reversed a four year drop and rose to 13 percent. The current account deficit widened to 7.6 percent of GDP, reflecting the export demand shock and the structural trend of rising investment in the context of stable savings. Inflation, after reaching a low of 5½ percent in mid-1999, accelerated in the second half of the year, as the 12 month price increases rose to 9.8 percent in December, exceeding the official target of 6.6-7.8 percent. Though real wage increases have remained moderate, rising food and oil prices and the weakening of the zloty contributed to the inflationary pressure.
A planned reduction in the general government deficit failed to materialize in 1999. The slippage, amounting to 1½ percentage points of GDP relative to the general government deficit target, mainly reflected teething problems with the 1999 pension reforms: many contributors to the pension system exploited a loophole in the legislation which gave rise to a one month loss of revenue in 1999; collection ratios fell due to administrative problems and financial difficulties in some state owned enterprises; and planned improvements to the sickness benefit system were delayed. The central government cash budget, however, was on track as a cyclical slippage in revenues was offset by midyear increases in excise taxes and cuts in expenditures.
After some easing of the monetary policy in early 1999 to bolster exports and activity, the Monetary Policy Council responded decisively to the acceleration in inflation by raising the central intervention rate by 100 basis points in September and by a further 250 basis points in November. In this context, the zloty strengthened by some 5 percent during December-January.
Despite the difficult macroeconomic environment, substantial progress has been made on the structural front. A wholesale reform of the government operations was initiated, mostly with effect from early 1999. A multi-pillar pension scheme was introduced; authority for public spending in certain areas was devolved to the local governments; a multi-stage process for establishing an internal market in the public health system was initiated, beginning with the creation of public health insurance funds; and the education system up to the middle school level was reformed. Parliament passed a major tax reform in late 1999. It substantially reduces corporate tax rates, reduces tax incentives and exemptions, and broadens the VAT base. Privatization was accelerated; with the sale of two large state banks and divestments in large state owned enterprises, receipts almost doubled from 1998 to reach 2.2 percent of GDP in 1999. Coal sector restructuring, supported by the World Bank, progressed: mines were closed, production cut and 25 percent of the coal workforce accepted redundancy packages or early retirement.
A strong recovery of growth started in mid-1999 and is expected to continue through 2000. Alongside the stabilization of the Russian market and the pick up in EU demand, investment and household demand accelerated. This was reflected in a sharp acceleration in credit to households, industrial sales, and GDP. Output growth is expected to rise over 5 percent in 2000, with a modest strengthening of the external current account balance. Inflation is expected to fall during 2000 owing to tight monetary and fiscal policies, the recovery of zloty from its late 1999 lows, continued high productivity growth, and moderating international energy prices. Wage pressure will be contained by the high unemployment rates, and the planned moderate budgetary wage increases.
Executive Board Assessment
Executive Directors commended the authorities for their strong record during the past decade, which has consistently placed Poland high among the most successful transition economies. As a result of firm macroeconomic and structural policies, economic growth has been robust, and inflation has been substantially lowered in recent years.
Directors noted that external developments—the Russian crisis, the deceleration of activity in Europe, and the increase in oil prices—had adversely affected economic developments in Poland in 1999. Economic growth had slowed, unemployment had edged up, the external current account deficit had risen sharply, and the general government deficit and inflation had exceeded the official targets. They welcomed the authorities' policy response to these challenges, which included a mid-year fiscal tightening and increases in interest rates.
While Directors noted the strength of direct foreign investment, the high rates of private fixed capital formation and the well-supervised financial markets, they considered that Poland was still vulnerable to changes in market sentiment if the external current account deficit did not decline. Accordingly, Directors emphasized the importance of addressing the current account imbalance, as well as reducing inflation, by persevering in the implementation of fiscal adjustment in 2000. They stressed that progress on this front and continued implementation of the ambitious structural reform agenda should improve conditions for sustainable growth, as well as support the authorities' objective of securing early accession to the European Union.
Given the planned fiscal consolidation, the tight monetary stance, and continued wage moderation, the authorities' inflation target for the present year and for 2003 appeared achievable. Directors encouraged the authorities to strengthen the inflation targeting framework by announcing a target path toward the 2003 inflation target. These changes would buttress the anchor for inflation expectations and ensure the continuity and consistency in monetary policy making. Some Directors noted that the recent increases in official interest rates had been accompanied by a sizable appreciation of the zloty vis-à-vis the basket, and expressed concern about the effects of this appreciation on the external sector. In this connection, these Directors stressed the importance of proceeding with fiscal consolidation in order to ease pressure on interest rates and reconcile the tension between the price and external current account objectives.
Directors supported the authorities' intention to continue to abstain from intervention in the foreign exchange market—a policy that has served Poland well. Some Directors observed that the crawling exchange rate band no longer served a purpose under the inflation targeting regime, and could be safely abolished. A few Directors suggested, however, that this step be undertaken only after the current account had stabilized at a manageable level. Several Directors encouraged the authorities to lift the remaining controls on short-term capital inflows, and supported the objective of allowing the freer movement of capital. Other Directors believed that these controls should be lifted only as the current account deficit begins to decline.
Directors commended the authorities' commitment to balancing the budget over the medium term, which should make room for an increase in private investment by helping relieve pressure on the current account deficit over the coming years, during which investment is likely to be strong. Directors emphasized the need for public expenditure restraint, taking into account the necessity of deficit reduction, the initial cost of structural fiscal reforms, and prospective expenditures related to EU accession. They welcomed the authorities' commitment to reform the tax system, the pension system, and the devolution of fiscal responsibilities to local governments. Over time, these reforms should further enhance efficiency and result in greater budgetary savings. Although local governments behaved in a restrained fashion, Directors urged the authorities to put in place an effective mechanism to monitor and help strengthen the framework for local government finances. They welcomed the authorities' intention to carry out a fiscal transparency assessment during 2000.
Directors noted the continued improvements in Poland's already strong banking supervision and regulatory framework. In light of the increasing amounts of fixed capital investment channeled through the banks and the associated large current account deficit, they welcomed the authorities' decision to proceed with a Financial Sector Assessment Program (FSAP) in 2000.
Directors welcomed the authorities' commitment to rapid completion of industrial restructuring and privatization. These reforms would be essential for the continued dynamism of the economy, and contribute to the preparation for EU accession. They viewed flexible labor market structures and reforms to encourage private investment as central to the more rapid creation of employment. In this regard, most Directors welcomed the authorities' plans to reform the minimum wage, and urged them to achieve any reductions in the work week without imposing rigidities on employers. They urged the authorities to continue to resist direct interventions, such as import protection and export subsidies.
While noting that Poland has subscribed to the Special Data Dissemination Standard and its statistical base is adequate for surveillance, Directors encouraged the authorities to continue to improve the quality of macroeconomic data, in particular balance of payments data and the transparency of fiscal data.
|Poland: Main Economic Indicators|
|Real economy (change in percent)|
|Real domestic demand||4.5||12.2||9.4||6.5||4.9|
|Unemployment rate (in percent)||14.9||13.2||10.3||10.4||13.0|
|Gross national saving (percent of GDP)||24.0||21.0||21.7||22.0||19.9|
|Gross domestic investment (percent of GDP)||19.8||22.0||24.7||26.4||27.4|
|Public finance (in percent of GDP)|
|General government balance 1/||-3.1||-3.4||-3.1||-3.2||-3.8|
|Money and credit (end of period, percent change)|
|Net domestic assets 2/||5.2||19.7||14.1||17.5||12.8|
|Money and quasi-money||34.8||31.2||29.1||25.2||19.4|
|Lending rate (annual average in percent)||33.5||26.1||25.0||24.5||17.3|
|Balance of payments in convertible currencies|
|Trade balance (in percent of GDP)||-1.5||-5.7||-7.9||-8.7||-9.4|
|Current account (in percent of GDP)|
|Including unrecorded trade||4.2||-1.0||-3.0||-4.4||-7.6|
|Gross official reserves (in billions of U.S. dollars)||15.0||18.0||20.7||27.4||25.5|
|Reserve cover (months of merchandise imports)||7.2||6.6||6.4||7.5||7.5|
|External debt (end of period) 3/|
|(In billions of U.S. dollars)||44.0||47.4||48.9||56.9||60.9|
|External debt service ratio 4/|
|Fund position (in millions of SDRs)|
|Holdings of zloty (end-December 1999)||1196.7|
|Holdings of SDRs (end-December 1999)||8.1|
|Exchange rate regime||Crawling Band 5/|
|Present rate||Zl 4.1011 per US$1 (March 14, 2000)|
|Depreciation (-) against U.S. dollar|
|(period average, in percent)||-6.3||-10.1||-17.8||-5.6||-12.4|
|Depreciation (-) of real effective exchange rate|
|(relative CPIs, in percent)||6.6||8.4||1.8||5.6||-3.5|
Sources: Central Statistical Office; data provided by the authorities; and IMF staff estimates.
1/ On a commitment basis.
2/ In relation to broad money at end of the previous year.
3/ The external debt data for 1998 and 1999 are not directly comparable to the previous years as the coverage was changed.
4/ In percent of exports of goods and services in convertible currencies, including the Fund.
5/ The zloty
currently floats within a ± 15.0 percent band around the central rate, which depreciates at a fixed monthly rate (0.3 percent since March 24, 1999) against a basket of currencies.
1Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. In this PIN, the main features of the Board's discussion are described.